In a recent video, I mentioned opportunity cost when discussing why I currently do not use branded packaging.
My reasoning is that the additional cost of branded packaging deprives me of the opportunity to do something else with that money, like make a new product, buy a new tool, or pay for advertising fees to increase my odds of reaching my intended audience. At this time, those things are more valuable to my business than branded packaging. I first want to focus on reaching an audience that vibes with Mulberry Moons and be able to meet their needs. Once things are a bit steadier, then I can branch out and start adding details that enhance the experience of shopping at Mulberry Moons.
I think it's a reasonable and simple way of looking at things, but I also wanted to take another look at opportunity cost because it's a great way of framing tough decisions for your business.
Opportunity cost is an economic concept that compares the outcomes of various alternative paths.
Simply put, opportunity cost is what you miss out on by choosing one thing over another.
Every time you are faced with a decision, there are different alternative paths you can take. Each of those paths results in different outcomes. Opportunity cost is a way of weighing those different outcomes against each other so we can choose the path that aligns most with our goals.
Mathematically, opportunity cost = return on unchosen option - return on chosen option
Let's compare apples to oranges
I can grow either apples, oranges, or both. To make things simple, let's limit things to one factor that goes into producing our fruit: water.
All other things being equal, we can decide which fruit to grow by comparing the water consumption of each one. An apple, for example, takes 125 L of water to grow, while an orange takes about 80 L. This means that for every dozen apples produced, the same amount of water could have been used to grow almost 19 oranges.
Of course, real life is more complicated than that, and there are many factors to be weighed. In the case of apples and oranges we could factor in the monetary return on each fruit, how much nutritional value we get out of them, how filling they are, how they are harvested, time it takes to grow them, and so on. It all depends on the decision being made.
In my case, I wanted to look into getting branded packaging because I'm obsessed with "pack an order with me" videos and love a beautifully wrapped package.
Regular brown gummed tape cost me $23 for 600 feet. Custom branded tape would cost about $66 for the same amount (or $90 for 820 feet). Because I'm buying tape either way, I only want to focus on the difference, which is $43. That number alone is the cost of switching tapes.
There is, however, a hidden cost in there.
If I kept that $43 and spent it on something else in my business, it would represent an alternative path where I do not buy the branded tape. This could be $43 on ad fees. In 2021, the average cost per thousand impression on Instagram ads was $2.50-3.50, so on the high end, that could pay for over 12,000 impressions. It could pay for forty-one 3" x 3" vinyl stickers on StickerApp, which can be sold for a profit to grow the business. Here's the kicker: It could be used to buy a custom stamp and still have money left over for ink. It could also go towards a custom embosser (it would be a little shy, but close). A stamp or embosser are still in the realm of branded packaging, but they're not consumables. The embosser in particular can be used without limit because it doesn't require any additional materials to work.
The opportunity cost of buying that custom tape, then, is the best benefit of these other options.
In short, if I buy the gummed tape, it costs me not only an extra $43, but the opportunity to buy ads, have additional products made, or invest in a more efficient way of branding my packaging.
What I lose out on by not choosing the branded tape is brand recognition and a chance to go viral in a "pack an order with me" video. I can live without that.
This was definitely a simplification of opportunity cost, which can be applied to countless things, especially investments, but a basic understanding is necessary because it lays the groundwork for other concepts, such as comparative advantage (aka should you make everything yourself or outsource it to someone who makes it more efficiently than you?).
Next time you have a big decision to make, compare the benefits of each option and ask yourself which benefit you would regret missing out on the most.